China has become a headache for Western conglomerate executives, but disrupting supply chains and reducing the purchasing power of 1.4 billion people is not easy. The good news is that this dilemma does not require radical mobilization by US and European company managers, as local Chinese partners can solve the problem by moving themselves. A case in point is the expansion of US electric vehicle manufacturer Tesla’s presence in Mexico. Foreign leaders have struggled to cope with China’s zero-tolerance policy on the coronavirus pandemic, rising labor costs and U.S. tariffs. Things get even more complicated should there ever be any repercussions from potential sanctions over a Chinese invasion of Taiwan. On the other hand, existing economic interests, as well as Beijing’s renewed initiative to attract foreign investment, work in favor of staying. After all, the country still accounted for a whopping 16% of global foreign direct investment inflows in the first half of 2022, according to the Organization for Economic Co-operation and Development (OECD). Western companies in China rely heavily on local suppliers rather than running their own operations locally or doing business with other foreign companies. In August, for example, a senior Tesla executive revealed that his Shanghai plant gets 95% of what it needs from local manufacturers.

Their prominence in the supply chain means that local partners can offer Western groups a painless way out of the stay-or-go dilemma. Chinese companies in the mobile phone, computer and electric vehicle sectors are increasingly looking to reposition themselves in cheaper and friendlier markets. Building factories elsewhere provides protection in case Western companies leave the People’s Republic. From the point of view of Western companies, this is now an easy way to move without rebuilding the entire supply chain from scratch. Besides Southeast Asian countries such as Vietnam and Eastern European states such as Hungary, Mexico is a popular destination, where a bilateral trade agreement with the US allows duty-free exports. At least 25 Chinese conglomerates supplying Tesla parts have made plans to invest in Mexico since September, according to Hangzhou-based Zheshang Securities analysts. This includes rare earths company JL Mag Rare-Earth, which is investing $100 million in a recycling plant that turns old alloys into permanent magnets. However, Beijing may even be able to counter this trend.

The earlier implementation of Chinese foreign policy, begun in the early 21st century to encourage state-owned conglomerates to expand overseas, was abruptly halted when officials became concerned about capital flight. It’s always a risk. But if Chinese suppliers now start ramping up foreign investment to keep their key customers, the government may have no choice but to give its blessing.